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Non-optimality of state by state monopoly pricing with demand uncertainty: An example

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  • Peck, James
  • Rampal, Jeevant

Abstract

This paper considers a monopoly’s profit maximizing problem, where there is a continuum of consumers with unit demand, and valuations are given by one of two possible demand distributions/states. The firm’s problem is to maximize profits by choosing an optimal mechanism among direct revelation mechanisms that satisfy interim incentive compatibility and ex-post individual rationality. We show that setting the monopoly price in each demand state may not be optimal.

Suggested Citation

  • Peck, James & Rampal, Jeevant, 2019. "Non-optimality of state by state monopoly pricing with demand uncertainty: An example," Economics Letters, Elsevier, vol. 183(C), pages 1-1.
    • Handle: RePEc:eee:ecolet:v:183:y:2019:i:c:9
    DOI: 10.1016/j.econlet.2019.108561
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    References listed on IDEAS

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    1. Ilya Segal, 2003. "Optimal Pricing Mechanisms with Unknown Demand," American Economic Review, American Economic Association, vol. 93(3), pages 509-529, June.
    2. Manelli, Alejandro M. & Vincent, Daniel R., 2006. "Bundling as an optimal selling mechanism for a multiple-good monopolist," Journal of Economic Theory, Elsevier, vol. 127(1), pages 1-35, March.
    3. Manelli, Alejandro M. & Vincent, Daniel R., 2007. "Multidimensional mechanism design: Revenue maximization and the multiple-good monopoly," Journal of Economic Theory, Elsevier, vol. 137(1), pages 153-185, November.
    4. Gabriel Carroll, 2017. "Robustness and Separation in Multidimensional Screening," Econometrica, Econometric Society, vol. 85, pages 453-488, March.
    5. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-361, March.
    6. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-1257, November.
    7. Peck, James, 2017. "Temporary boycotts as self-fulfilling disruptions of markets," Journal of Economic Theory, Elsevier, vol. 169(C), pages 1-12.
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    Cited by:

    1. Hussain, Jafar & Lee, Chien-Chiang & Chen, Yongxiu, 2022. "Optimal green technology investment and emission reduction in emissions generating companies under the support of green bond and subsidy," Technological Forecasting and Social Change, Elsevier, vol. 183(C).

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    More about this item

    Keywords

    Monopoly mechanism; Correlated valuations; Bayesian incentive compatibility; Ex-post individual rationality;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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